Uber Investor Has The Best Defense Yet Of Surge Pricing

Uber investor and board member Bill Gurley has a great defense
for the on-demand car service's surge pricing.

Surge pricing happens when there is a lot of demand, but not
enough cars on the road. So Uber raises its fares to ensure it
has reliable vehicles ready for those who actually need them.

These changes are driven by an algorithm when wait times are
increasing dramatically, Gurley notes on his blog. But a lot of people
seem to think Uber CEO Travis Kalanick just pulls a lever
whenever it decides to rain.

The idea for surge pricing, Gurley writes, came about in early
2012, when the Uber Boston team noticed there were a lot of
unfulfilled requests. That's because drivers were clocking off
the system to go home right before people were ready to go out at
night.

So Uber started offering its Boston drivers more money to stay on
the road longer. In just two weeks, Uber Boston increased the
number of cars on the road by 70% to 80%.

A lot of people compare Uber's pricing model to
that of airlines, hotels and rental car companies. But
Uber has a problem that those companies don't have, Gurley
says.

"At the exact time that riders want more availability —
Friday and Saturday night, in a bad storm, on New Year's Eve —
drivers would rather not be driving," Gurley writes. "You see,
while hotel rooms are fixed, Uber’s supply actually shrinks at
these times, because the drivers would prefer not to be working
at those times, either."

Here are some key stats from
Gurley's defense:

On average, over 80% of gross fares go to drivers.

Uber's surge pricing only affects a small minority of trips,
less than 10% of rides.